Good afternoon, ladies and gentlemen. Inés Arellano speaking. Welcome, thank you for joining MERLIN's first quarter trading update. Today, our CEO, Ismael Clemente, will walk you through the main highlights of the quarter described in the executive summary report available on our website. After the brief update, we will open the line for Q&A. For those of you who want to raise questions, please press star followed by number five. With no further delay, I pass the floor to Ismael. Thank you.
Thank you, Inés. Good afternoon. Welcome to MERLIN's first quarter 2023 results call. I am going to make a very quick intro on how the operations went during the quarter. Then we are going to move straight into our Q&A, which I believe will be the most practical way to do things. Well, following up on the very good dynamics of year 2022, particularly the second half, we have enjoyed a very positive first quarter in 2023, which is extending somehow to the second quarter. I mean, visibility as of today is good for year-end. It will be a good year for the company.
Although we expect slightly slower pace of activity during the second half amid, you know, the preparation for Spanish elections and also as little by little interest rate hikes start affecting the economy and provoke a small slowdown in the economic activity. In terms of growth of rents, we posted an 8.1% like-for-like increase that some of you have mentioned it is the best we have ever posted, just by chance. But yes, maybe. What is really important for us is that we significantly ate on the lower performance that was natural after the sale of BBVA. The FFO per share came up at -5.6%, which is significantly above what we had expected.
you know, if you pro forma for the sale of three, that was +20%. some of you are now asking for a new guidance for the year, et cetera. It is way too premature. I mean, we are expecting a number of CPI indexations in our cost base during the second quarter that will affect the company during the rest of the year. We also enjoyed very good financial conditions and reflected in good financial expenses in the first quarter, which we don't know whether we will continue experiencing during the rest of the year. yes, we are of course, making our best efforts to beat the guidance provided to you, but it's too early to try and anticipate a new guidance for year-end. There were no revaluations in the period.
NTA came up -3.1%. You know, we will only reappraise assets in the second quarter. At year-end, the release spreads, as commented, were very positive across the board. In offices, 2.8%, in logistics 4.9%, in shopping centers 7.9%. Some of you are pointing towards, you know, softening release spreads. As commented in a number of calls with you know that inflation and release spreads are the both sides of the coin. When you pass high inflation, sometimes you do it at the expense of lowering a little bit your release spread and vice versa. You know, if you are ready not to pass all the inflation that is due, you can, of course, increase the rent a little bit more.
Don't be alarmed because of that movement in release spread because it is normal that with inflation we are passing, we are also eating on our reversionary potential and is completely in line with what you have seen in many other real estate cycles. I mean, you shouldn't be alarmed about that. Strong operating performance, as commented. Very resilient occupancy, - 35 or + 35 basis points versus the same quarter last year, - 20 basis points more or less overall as compared to year end. Just for your tranquility, because some of you are asking why occupancy has gone down in logistics. We said logistics was simply a rotation of a client that we moved from an existing facility of ours into a new facility that we built for them.
The previous facility went vacant, and we have now subsequently let up that facility, and we are back as of today at 99% occupancy in logistics. That occupancy will somehow keep towards year-end. I don't know whether it will be 99% or it will be 97.5% or 98%, but anyway, I would call it pretty much full occupancy. In shopping centers, we have a number of rotations of clients which are normal in Spain in the first quarter. We are leasing up quite rapidly, and we expect also the year to end up on a positive tone. Probably we will end up with a portfolio slightly above 96%, hopefully.
I mean, if it is not 96%, I beg your pardon, but we will try to be, we are working towards achieving that scenario. In offices, our base case is for a slight decrease in occupancy because we expect a milder second half of the year owing to a softening of the economic activity. As you may know, Spain has been creating employment recently, but it's, you know, significant chunk of that is public employment. In reality, that doesn't translate into a lot of economic activity and particularly office demand. We are experiencing a slower market in the first quarter. Take up in Madrid has been like 113,000 square meters, which is around 20% lower than last year and historical averages.
We expect that trend to continue during the year. Impact of work from home continues to be negligible. I mean, what might cause the slowdown in demanding offices will be, I would say, more economic tone than WFH. I mean, WFH continues to have adoption rate in Spain continues to be very, very low. We have continued managing our liabilities. We refinanced the 2023 bond with bank facilities, with a slightly increased cost of financing, but it's still within very positive territory. We are now running at 2.2%. We have made no investments during the period, no divestments.
I mean, Following the close of the quarter, we invested little money in the acquisition of extra area in our Marineda City shopping center in Galicia from El Corte Inglés, and we disposed of two non-core shopping centers that we have longly waited to dispose. Finally, the market is reopening a little bit, and we were able to dispose those, you know, post close of the quarter with a very positive effect in overall occupancy in our shopping centers division. That is basically all from my side. We will open the line for Q&A, which probably is the best use of our time.
Thank you, Ismael. For those of you who want to raise questions, please express start followed by five. We have the first question coming from Ignacio Domínguez from JB Capital. Hello, Ignacio.
Good afternoon. I just have one question on your statement that you expect lower activity in the office market by year-end. I was wondering if you could provide more visibility on this. Thank you.
I have no specific visibility, Ignacio. It's simply the a consequence of conversations with the different market actors. We have seen a lower activity in the first quarter than historical averages. We are seeing also a relatively slow second quarter. Generally speaking, the clients are dragging their feet. They are not taking decisions, they are not expanding business lines, they are not taking relocation decisions. That has a good side, which is that retention rate increases. I guess this year, our retention rate will probably be close to 85%. The churn, the other 15% is more difficult to relet. It takes a little bit more time. Tension in rents remains. I mean, rents continue to go up in CBD and sometimes surprisingly for most of you, even in peripheral areas.
We continue to have a positive market. It's not that we are in a complicated or in a super complicated market. I simply wanted to warn all of you or to in advance that offices will not perform as strongly as they performed during 2022, because 2022 was clearly a year of catch-up. People took a lot of decisions following the COVID. People did a lot of relocations. People increased space for some of their workforce. In 2023, we are seeing the companies with a much more cautious stance. In negotiations with them, we see also a clear miscalculation of the real needs of space they have.
If they want to let new space, they normally miscalculate and take less space than they really need. After three, six months, they come to you and ask for new space, when in some cases we have already let the space. That means basically that sets the tone for the market. They are super prudent. People are super prudent now in offices. Shopping centers, however, we see a continued good performance in all aspects. I mean, the sales per square meter have surprised us very clearly on the upside. In some of these calls, we have been commenting on whether the increased sales as compared to 2019 were simply a consequence of inflation.
We can say that they are well above the accumulated inflation since 2019. Very, very positive tone, and we expect that positive tone to continue during the year because the touristic season will be good. I mean, you all know that will have a positive effect in our sales in our shopping centers. In logistics, the activity is good. Online sales remain stable. Of course, not growing as they were in the past or at the same rate they were growing in the past. There continues to be a strong demand. What is peculiar is that the market is now a little bit more favorable to us because we own land, very good land, at very good, very compelling prices.
What we are seeing is that there is a credibility crisis now in the market. Many of the clients now do not dare to go and do a pre-lease with a turnkey delivery of a building with one of the tourist investors that have populated the market for so many years. Now that people is having more difficulties in finding financing, let alone buying new land because land has become really expensive. We are seeing a stream of new demand from traditional clients that have now stopped doing experiments and are coming down to, back to us.
We will be announcing a very significant stream of pre-let starts during the second half of the year that will result in deliveries in the second semester of next year and good cash flow in 2025 in logistics.
Any other questioning, Ignacio?
No. Thank you.
Thank you. We have another question from Florent Laroche from ODDO. Hello, Florent.
Yes, good morning. Thank you for this, for this, presentation. I would have maybe, two question. Would it be possible, to have, further update on data center so we can see that the pre-consolidation is moving faster than anticipated? What can we expect, in our models in terms of, recognition of, rental income? Maybe the second question, could you please tell us, how you see, the evolution of the investment market, in offices, in Madrid and Barcelona?
Okay. I will start with investment market for offices. Investment market remains open. Main actors are family offices, some small insurance and mutual companies of a local nature, mainly Spanish. Curiously enough, we have seen a new actor, which is French OPCI. We are having now a stream of acquisitions or intended acquisitions that are being attracted by French capital, I guess because of the significant arbitrage between the Spanish market and the French market. You know, we are seeing some interesting activity stemming out from France. Data centers. Well, it's too early to extract conclusions, but we are very, very glad with the way they are progressing.
As you know, we started with 4.2 MW pre-commercialized, the construction of the three data centers we have in Spain that are already licensed and under construction. We haven't yet started the data center in Lisbon, for which we have a very, very strong demand. What has surprised us a little bit is that during construction, we entered into discussions for a number of leads. As a consequence, our American partner, Endeavor, ended up signing a global MTSA, so a global agreement with a big hyperscaler of which 2 MW have been assigned to Spain. You know, the 4.2 moved to 6.2.
We are now also in very advanced conversations with another cloud integrator that will bring between 2 and 5 MW extra to our three existing data centers in Spain. Using or taking, you know, averages, we believe that we have basically finished commercialization of the 9 MW with which we started our program and have started procurement immediately to bring another 6 MW of equipment because generally speaking, the boxes are already built. What we are doing now is fitting in additional modules. We are fitting in additional modules, and we are bringing new equipment in order to raise our 9 MW to 15 MW.
If you put that in perspective, um, you might remember that our phase one, uh, of our data center deployment, um, uh, business plan was to simply de-demonstrate to the market our technology before the end of 2024 , and our internal targets were to have at least three data centers up and running and at least 12 MW, uh, commercialized. Um, it will depend on the, on the, on when we receive the construction license in Lisbon, but it looks at present like we are going to have the four data centers up and running, maybe the one in Lisbon about to open, but, uh, you know, give or take. Uh, so and, at the very least, 15 MW commercialized, I think it will be more than that. Particularly because.
Okay.
In the case of Lisbon, we have a very strong market interest. If we get the construction license for that one, I guess we are going to sign or we are going to start it with a significant amount of pre-let for the first building. Effects in rental income, Florent, of course that is more complicated to assess. Yes, I mean, rental income will be anticipated significantly. What we were expecting for end of 2024 will probably be advanced to somehow mid 2024 or even second quarter of 2024. We will go a little bit in advance.
What is more important, what it is looking is that the, what we call the rollover phase, the second phase till end of 2027 could be also significantly anticipated. We like what we are seeing, and we need to remain, of course, prudent because this is a new market for us. But we like what we see and we believe this will be a very significant pillar of growth of the company for the coming months/years.
Okay. Thank you, that's very interesting. Thank you.
Thank you.
Thank you, Florent. The next question comes from the line of Marie Dormeuil from Green Street. Hello, Marie.
Hi, thank you for taking my question. I had two questions. First one maybe with regards to the refinancing of the bond. Can you, is it a floating rate or have you fixed it? If you can give us a sense of, did you even consider the bond market at one point, or was it really the spread too big between, you know, bank refinancing versus bond market? Just to give us a sense. The other question relates more to capital allocation for the rest of the year. Do you, how do you see, you know, how do you see maybe 2023 and 2024?
Do you want to continue to be like net seller in putting aside, of course, your development pipeline, but do you want to continue to try to sell or are you looking at, you know, acquisition opportunities?
Okay. Okay. Well, on the refinancing, we chose the bank market because the bond market was giving us a much higher execution cost. At the time we did the refi, the best we could achieve in the bond market, that was in a moment of significant hysteria, was like 280 around, 280-290 basis points credit spread. Whereas in the bank market, we ended up achieving 126 basis points. The arbitrage was very significant, hence why we chose to go through the bank market. As you know, one of the advantages of a real estate company is that you can choose a little bit how you finance yourself.
You can do it, company, unsecured, you can do company secured, you can do subsidiary secured, subsidiary unsecured, or even asset secured if need be. We will continue exploring different alternatives for financing, trying to obtain cost efficiencies, rather than simply fall in the arms of markets, when markets are particularly dislocated like they were at the time we did the refi. Regarding the rates, we fixed them, we swapped them. We were extremely lucky at the time we did it, because we achieved, what, a 3.77% all-in cost, because the swap was set at 2.51%. We were lucky in, and through wonderful execution from the finance department, we were lucky to fix the rates at the convenient moment.
While the 3.77%, of course, is much higher than the 2.25% we were paying, there was a loss of around EUR 10 million per year in cash flow erosion in that refinancing. You know, that was immediately more than covered by the increase in the top line owing to inflation. I mean, 3x coverage, we obtained an increase in rent of EUR 30 million just on that year, and it will be 2025 this year. We are okay with that. Regarding capital allocation, the company more or less has done its homework. I mean, we are happy with what we have achieved, we are under no rush to sell assets and particularly fire sale assets into the market.
We are in no pressure to raise capital. We are in no problem regarding debt service. We will try, we will continue rotating assets. As you know, we have an internal policy which is to identify every year around 1% of the portfolio that we consider, let's say, the most non-core at every possible moment of our portfolio, and we try to rotate those assets identified into the market. You will see us doing some other transactions during the year, for sure. We don't know what amount we will achieve. As you know, 1% of our portfolio will be like EUR 110 million, but if this year instead of EUR 110 is EUR 80 million or EUR 90 million, we will not become Talibans of non-core sales.
I mean, we will be happy with whatever good executions we can, we can do in the market and try to protect shareholders' money. Acquisitions, not for the moment. I mean, our cash flow generation is mainly geared towards dividend payment, as you know, and we will continue also fueling our CapEx program. I mean, our big priority at present is more CapEx than it is inorganic growth through acquisitions. Because first, the market is not yet ripe for it. The, the damage that little by little the hiking interest rates will end up inflicting in the market is not yet, you know, evident, so it will take time to really materialize, and we need to wait.
For the moment, what we are trying to do is continue CapExing our portfolio because we have very good growth opportunities, very good opportunities to grow our rents and our cash flow, which is at the end, what will move the needle in terms of price. You know, people is increasingly now looking at cash flow generation. I mean, theoretical value of assets, even in credit metrics, LTV has now probably lost a little bit of might, and people are starting to look more at net debt to EBITDA and net debt to cash flow. You know, basically the only way forward for us is to try to grow cash flow through the development of the business lines that we are at present trying to create for the company.
Thank you very much.
You're welcome.
Thank you, Marie. If there is any other question, please press star followed by number five. Give you a second. If not, you can always call us afterwards because. Yeah, we don't see further questions over here. All right. Well, thank you all for joining us today at MERLIN's first quarter results presentation. Seth, we remain at your disposal. You can contact us anytime, and we'll be more than happy to answer your questions. Thank you and have a great weekend.